The Innovation Illusion: how so little is created by so many working so hard
Innovation is not working nowadays in the western world as we think it is. Erixon suggests that we should rethink the role of IPRs. Would it not be better for governments to be more selective in determining to whom a patent should be granted?
Intellectual property rights (‘IPRs’) come from a long and rich (legal) tradition. It is also a strong legal tradition that has been directly influencing policy discussions for over 50 years. There are moral and economic advantages (given) to being a creator. Fredrik Erixon argues that, even though we have this tradition, we should rethink the reason we have IPRs and should only have, or keep, them if we can point to two particular features: (i) if it stimulates innovation, and/or (ii) if it stimulates market-based diffusion of innovation. The outcome of it must be that it drives economic prosperity and that society is better off by having IPRs. But, Erixon questions whether we “are better off for having IPRs [in their current form]?”
He acknowledges that it is almost impossible to confirm or reject hypotheses about whether IPRs in isolation drive economic prosperity or not. The most important indicator [in economics] of societies’ ingenuity is the ‘total factor productivity growth’. Unfortunately, we can see from statistics that in the last decade we have been less capable to generate prosperity and a better economy by technology and innovation. According to Erixon, this development can be linked to three changes that took place over time, which the intellectual property system seems to reinforce.
These three major changes are:
The trend we have seen in the past decades is that the degree of ownership by institutions such as pension funds and large listed companies has increased, at the expense of ownership by individuals or families. Now, these companies do not own companies because they have an entrepreneurial idea; they own shares in companies because they believe this to be a good investment to multiply the funds people have put in them. These institutional investors leave it to others to decide what happens within the (acquired) company. In essence, these institutional investors aim at reducing risks that managers make bad decisions over the company. Hence, the decisions made by these institutional investors to not retain earnings but to allocate money to the shareholders by turning out dividends or share buybacks, leads to less investment in innovation. If they want to make investments in innovation, they then have to turn to capital markets, whose players are not keen on granting large long-term loans. The consequence is a short term investment vision and short investment duration. Real investment therefore gradually goes down, leading to less innovation.
Globalisation has changed corporate behaviour. One of the main drawbacks may be that large corporations have various opportunities without having to innovate. They earn revenue without making significant investments simply by the possibility that globalisation gave to step into a lot of other markets that had been closed before. This leads to a gradual decline in investments into R&D. Furthermore, it may also lead to value chain and supply chain fragmentation. Large multinationals do not produce much themselves. A lot of the actual production is outsourced through long, sophisticated and complex supply chains, leaving the multinationals to take care of logistics and branding. Since globalisation opened opportunities to produce in different parts of the world, especially the large companies grew to be very skilled at forcing their suppliers in taking over other producing companies. This does not only lead to a gradual decline in investments into R&D and innovation, because of the use of the same processes, but it also reduced competition in our economy. There is less space for anyone who wants to enter the market with an alternative technology or idea. Newcomers are basically forced to step into the supply chain of the large companies, in order to get the necessary components.
A third trend we can see is the influence of economic regulation. In the 1980s/90s, Western economies went into deregulation. This led to more competition, fewer (legal) monopolies, and fewer restrictions to enter the market to compete. However, after that, starting from the year 2000, regulation, restrictions to market-entry and competition have gone up again, increasing regulatory trade barriers. Only during the last year has there been a new trend towards de-regulation.
The increase in regulation is not only problematic; it is its complexity that leads to legal uncertainty. Innovators often do not know whether they comply with regulations or whether they, at the same time, break other regulations. Complex regulations lead to conservative behaviour. If a company is unsure whether or not it will be legally possible in ten years to commercialize an invention, companies tend to back out of the investment.
Erixon argues that the type of capitalisation developed over the past 50 years has been strong on globalisation but not on innovation. Due to increased global trade, foreign direct investments and the internet, IPRs have been able to diffuse rapidly across the globe. This makes it more difficult to protect IPRs. The speed of imitation and diffusion to the market has increased. This supports the assumption that we do not have a diffusion problem, but an innovation problem.
In the field of intellectual property rights the problem is that markets are controlled by fewer companies and their power has gotten stronger. They are skilled in using the power of branding and brand-loyalty to control customers, instead of innovating. Exemplary is – the once very innovative – Apple, which benefits from their unique ability to lock the consumer into a particular behaviour of loyalty to their brand, rather than bringing true new inventions to the market. First entry to the market leads to the advantage of consumer loyalty, even when others imitate the products. This shows that entry speed to the market, rather than what is created, is what matters more in today’s economy. This, plus more extensive use of trade secrets leads to new questions for IPRs and their role.
Erixon suggests that we should rethink the role of IPRs. Would it not be better for governments to be more selective in determining to whom a patent should be granted? Should we not promote granting exclusivity to companies that are worthy of it, that do in fact innovate and promote creativity rather than those that use the system to protect themselves from competition and from forces of technological change? Should there be stronger protection for smaller and new coming companies facing companies like Apple and Samsung? Currently, Erixon argues, we are not selective in who we grant exclusivity to; this chokes (some) innovation initiatives.